How home-based freelancers can claim energy costs from HMRC

Having to bear the cost of turning up the heating and switching on the lights when it’s still the afternoon is likely to be a necessary evil for home-based sole traders, as the cold snap of New Year 2019 arrives this week, writes Emily Coltman, chief accountant at FreeAgent.

To ease the pain of a hefty utilities bill just as the January 31st tax deadline nears, remember that HMRC permits one-person businesses like you to use a “reasonable method” to claim a proportion of the gas and electricity costs -- in the part of the home that you use for business.

As a self-employed freelancer or sole trader, you'll be able to claim a business proportion of your energy bills or use the Flat Rate method to include an equivalent of them. You can also include a business proportion of other home costs such as your rent, council tax, mortgage interest (not the capital element of a mortgage), insurance and any repairs or cleaning that include the room(s) you use for your business.

How to go Flat

The Flat Rate method is a simple way to claim the costs of energy bills and is available to sole traders and partnerships where the partners are individuals, not limited companies. It allows businesses to claim a set amount of tax relief for the business use of their home depending on the number of hours spent working at home each month. The rates are:

Hours spent working at home per month

Flat rate per month

25 to 50

£10

51 to 100

£18

101 and more

£26

The ‘Fair and Reasonable’ method

More typical is for sole traders (and ‘Ltd’ company directors) to work out the tax relief they can claim for working at home by calculating a “fair and reasonable” share of the home-running-costs to include in the accounts as a cost of the business.

Here’s one way to work out a share of your home-running-costs.

First, count all the “normal living spaces” in the home -- so, excluding bathrooms and hallways.

If your office is separate from the main house, for example, is in the garden, and is billed separately, you should treat it as a one-roomed house. If its utility costs are included in the rest of your household bills, treat it as an additional room.

Next, identify the rooms you work in. And then more than that -- work out what percentage of time spent in each room is business and personal. If you spend ten hours a day in your living room, seven hours for personal time and three hours for business, then 70% is personal and 30% is business. If you work in a dedicated room, such as a home office, you might well spend 100% of your time in there for business.

However, you should be aware that if you have an entire room dedicated to business use, you will need to pay Capital Gain Tax on it if you sell your home! A neat way around this is to make the room double as something else, like a music room or a workshop.

Room to save?

Next, get ready for some division! Although there is no HMRC guidance on how to go about dividing the cost of your bills between the rooms in your house, this calculation, as said previously, should be “fair and reasonable”. One approach is to take each of your bills separately and then divide the cost evenly between the number of rooms in your house. For example, a five-room house with a gas bill of £360 will come to a cost of £72 per room (£360 ∕ 5 rooms = £72 per room).

Lastly, you need to apply the percentage of work use to the relevant room costs. Remember, so far you’ve worked out the percentage of time you spend working in each room; and for each bill, the total cost that applies to each room.

A saving not to be sniffed at!

Now you can mitigate your gas and electricity bills, and other costs if you’re a sole trader, by working out the business cost of each and claiming them as an expense on your self-assessment tax return. For example, if you spend 95% of your time working in your home office (for limited company directors, this ‘time spent’ must not include admin work), and the total cost of heating that room is £72, you would claim: £72 x 95% = £68.40 as business expenses. And if in the same room the cost of electricity is £40, then it’s £40 x 95%, returning £38 as business expenses. That’s a total of £106.40 saved on your energy bills! So not bad at all, and certainly not to be sniffed at during this cold time of year!